Outback returns to roots for $3.2B

Three partners who opened the first Outback Steakhouse will join investors to buy back the empire.

By KRIS HUNDLEY
Published November 7, 2006

In a dramatic effort to escape a punishing stock market while reviving flagging sales, the founders of Outback Steakhouse want to remove their restaurant empire from Wall Street scrutiny and go back to the private market.

Chris T. Sullivan, Robert D. Basham and J. Timothy Gannon - partners who opened the first Outback Steakhouse in 1988 and built their concept into a global icon and one of Tampa Bay's biggest public companies - are joining with two deep-pocketed investment firms to buy out the company for $3.2-billion.

The board of OSI Restaurant Partners Inc., parent of the Outback Steakhouse restaurants and seven other chains, on Monday said it has accepted the offer, which translates to $40 a share. The buyout bid represents a 23 percent premium to the company's closing price on Friday of $32.43.

The deal comes at a time when OSI's flagship chain has lost favor with consumers, dragging down sales and putting a damper on its stock price. OSI's shares hit a four-year low of $27.30 on July 31.

The stock slump was quickly erased by news of the buyout offer Monday. Investors drove OSI's stock up nearly 24 percent before it settled back to close at $39.75, up $7.32.

Outback's malaise has been reflected in the $68-billion casual-dining industry, which saw sales suffer over the spring and summer as soaring gas prices made consumers think twice about eating out.

Though OSI announced several efforts to improve its Outback chain last summer - from sprucing up the decor to slicing sirloin prices - management apparently wants time to execute those plans without the pressure of analysts and quarterly earnings reports.

Last spring, the company hired a consultant to help it sort through strategic options. In June, OSI came under fire from Pirate Capital LLC, a Norwalk, Conn., hedge fund that tried to use its 5.3 percent stake in the company to force OSI to spin off some of its faster-growing chains. OSI's management resisted the pressure and by late August, Pirate had sold its shares at a loss.

On Monday, Bill Allen, who succeeded Sullivan as OSI's chief executive in March 2005, said the buyout approved by the board was the company's best course of action.

"As a private company, OSI will have greater flexibility to focus on our long-term business improvement initiatives," he said, adding that no jobs will be cut if the privatization is completed. At the end of 2005, OSI had 95,000 employees.

Sullivan, who has remained chairman of OSI's board, owned 3.32 percent of its stock as of March, according to a filing with the Securities and Exchange Commission. Basham, who retired as chief operating officer in March 2005 and also remains a director, has 5.82 percent of OSI's stock. Gannon, a former chef who oversaw OSI's food operations, has not held an official position with the company for at least a year. His OSI holdings are not publicly reported.

Though Outback's founders have built a well-known brand with a high-profile in the Tampa Bay area, the men behind the brand have always jealously guarded their privacy. Sullivan, who has been semiretired at his home in Pebble Beach, Calif., often dodged reporters eager to learn how the founders parlayed their early training at a Tampa Steak and Ale into a multichain empire. On Monday, he welcomed the opportunity to take the trio's brainchild back into the private sector.

"This company was built around a set of principles and beliefs that emphasize consistently high-quality food and service, generous portions at moderate prices, and a fun, casual atmosphere," Sullivan said. "Bain Capital and Catterton share our commitment to this philosophy and, as we return to private ownership, will support our people in achieving our long-term goals."

OSI is not alone in its desire to exit the public market. Publicly traded corporations are complaining about the added expense and public examination that accompanied post-Enron legislation and analysts' focus on quarterly results.

At the same time, private equity funds are awash with cash and anxious to find investments. HCA, the nation's largest hospital chain, is in the process of being taken private and on Monday the hotel chain Four Seasons announced similar plans.

The two funds backing OSI's founders are particularly well suited for the deal. Both Bain, with $40-billion in assets, and Catterton, with $2-billion under management, have invested extensively in restaurants. Bain has invested in Domino's Pizza, Dunkin' Donuts and Burger King while Catterton's portfolio has included P.F. Chang's China Bistro and Baja Fresh Mexican Grill.

Malcolm Knapp, who owns a restaurant advisory firm in New York City, said OSI's choice of investors is telling.

"These people are longer-term players, not flippers," he said of Bain and Catterton. "The whole point of this exercise is for the long-term health of the business, not realizing maximum money for shares. And you've got the founders, who have the largest individual stakes in OSI, participating. That's a clear signal this is a way for the company to get things in order and move forward as opposed to cashing out."

OSI's board said it will be open to better offers for the next 50 days and on Monday, there were rumblings of dissatisfaction on OSI's Yahoo message board from shareholders who felt the offer undervalues the company's assets. But Knapp said the buyout package, which is not subject to a financing condition, has distinct advantages.

"There's going to be significant capital required to reinvest in the restaurants," he said. "So whoever is bidding has to understand the bid will require follow-on capital."

While OSI's buyout offer was the big news on Monday, the company also announced it will be restating its financial statements because of unearned revenue for unredeemed gift cards. Earlier, the company estimated it had understated its liability for unearned revenue from unredeemed cards by $20-million to $40-million. On Monday, it upped that liability for unearned revenue to between $50-million and $70-million.

Aside from the restatement, Outback's largest chains have a more basic problem: getting enough customers. As of August, Outback had posted negative same-store sales for 14 of the past 15 months. Carrabba's had negative same-store sales for the past six months and Bonefish for the last three.

OSI's Allen warned that, even with private ownership, Outback's turnaround will still take another 18 to 24 months.

"While gasoline prices and home heating prices are better," he said, "there are significant reasons to think that this down cycle will continue for a period of time."

Information from Times wires and Times researcher Cathy Wos contributed to this report. Kris Hundley can be reached at hundley@sptimes.com or (727) 892-2996.

About the company

Headquarters: Tampa

CEO: A. William Allen III

What it does: Operates eight restaurant concepts including Outback Steakhouse with nearly 1,300 locations in 50 states and 21 countries